Today’s REI Classroom Lesson

Kathy Fettke explains what a syndication is and what to look for when finding the right syndication.

REI Classroom Summary

There are some key factors to look at when considering if a syndication deal is a good investment. From the executive summary to the other investors’ experience, you need to know what you’re getting into.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Kathy: Hi, I’m Kathy Fettke, Co-CEO of Real Wealth Network and host of the Real Wealth Show podcast on iTunes. And welcome and thanks for listening to me here on FlipNerd’s REI Classroom. I want to talk a little bit about investing and syndications.
Mike: This show is sponsored by passiverental.com.
Kathy: Because a lot of people come to me and say, “Hey, I found this deal or somebody presented this deal. What do you think?” Well, it’s a lot to ask me to read what they’re investing in because usually the private placement memorandum or the offering documents can be 50 pages long. But I’ll still take a quick glance and really just look at the executive summary. And that’s where you’re gonna get most of your information is in what would really just be a paragraph, an executive summary describing this investment.
So let’s kind of go back one step and say what is syndication. It’s simply a group investment. It means that people are pooling their money, buying something bigger than they would maybe buy on their own, and there’s a manager in place. So here’s the things you want to make sure are in place before you even waste a minute considering the investment.
Number one, is there a PPM? It’s what I said earlier, a private placement memorandum. This is a document that’s required when doing a syndication which describes the investment. So make sure you have access to that private placement memorandum. If it’s a crowdfunding deal then you’ll still want that description of the offering documents with the risks associated, with the background on the managers and they’re experience and the business plan and so forth.
But with a private placement that’s usually not a crowd funded deal. It means that it was only, it’s best to go to friends and family of the operators or people they know. So that’s a whole another SEC thing we could talk about on another show.
But either way, when a deal comes across your desk and someone says, “This will be a great investment for you,” the first thing you can do is, again, read that executive summary and see if it makes sense. It’s kind of amazing that, this is a very simple investing tip, if it’s not something that could be explained easily to your grandma or your mom then maybe it’s just too complicated. And with real estate investing it doesn’t have to be complicated. It’s pretty easy. In fact, I’m a part of a really awesome startup right now that I would love to talk about on another show.
One of the things that they said to me is . . . one of the reasons they came to me to help run this startup is because I summed up a very complicated investment with real estate in about a paragraph. And this is exactly what they said, “Oh, my gosh, my grandma could understand this,” that means that other people will want to invest and want to be a part of it.
So make it simple and if the executive summary is not simple to understand then something is wrong. So that’s first and foremost. Just make sure it’s easy to understand, not too fancy, not too complicated. I’ve seen some of these creative people, creative investors that maybe get just a little too creative.
So that leaves me to the second thing you want to look for and that is who are these people backing the deal. Who’s managing it? Who’s behind it? That is probably the most important thing you need to look at. Do these people have a track record? Do they know what they’re doing? Have they discussed what they’ve done successfully and not so successfully? What have they failed at?
Now, if they haven’t failed, good for them. But if they have, maybe even better because it’s kind of like if you were going to go on a ship, you’re going to go on a cruise, and the captain of the ship had never sailed in rough waters. He couldn’t talk to you about some of the more difficult times. Well, then that will be a little scarier than going with a really seasoned captain, right? So find out what their experiences both good and bad and challenging and all of that.
And make sure that whatever that experience is it’s exactly what they’re trying to do in this investment. So in other words, some of the investment deals I’ve done poorly where I lost money were when I put my faith in somebody who actually had a good track record, was a good person, very smart, great investor, but what we were trying to do was something that they hadn’t done before. So he was used to flipping homes very, very successfully, but we bought a subdivision that had never got its certificate of occupancy.
So he didn’t really understand the difference there between rehabbing a home that’s already been on the market, it’s an existing structure versus brand new in a subdivision format that has . . . sorry, I’ll turn off my phone . . . HOAs and different things that need to be in place, so that ended up taking years longer than expected. It was very difficult and I lost my money, so bummer. You don’t want that to happen to you. So make sure that the person has years and years of experience with many different deals doing exactly what they’re describing to you in this investment.
And if they have a great reputation and experience, the chances of them screwing that up and doing this deal for practice, for lessons versus for actually profit, you want to work with someone who is gonna make a profit and not just practice on your money. So those would be the most important things to look at.
And then to make sure that it’s filed correctly. So one deal that I turned down, thank goodness, was with a group who once I looked a little further into the documents I noticed that it didn’t look like it was filed correctly. Now, you might now know what to look for but you can simply ask who’s your attorney and how did you file this with the SEC. And if they can’t answer that then that’s a huge red flag. So there’s just a few things to help you when investing in syndications.
Again, I’m Kathy Fettke, Co-CEO of Real Wealth Network, host of the Real Wealth Show, and thanks for joining me.
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Kathy Fettke is the CEO of Real Wealth Network, host of the Real Wealth Show in iTunes, and best selling author of Retire Rich with Rentals. With a passion for researching real estate market cycles, Kathy is a frequent guest expert on CNN, CNBC, Fox, Bloomberg, NPR, CBS MarketWatch and the Wall Street Journal. She was also named among the “Top 100 Most Intriguing Entrepreneurs” by Goldman Sachs two years in a row.